An introduction to U.S. macroeconomic policy issues, such as how we use monetary and fiscal policies to promote economic growth, low unemployment, and low inflation.

Friday, January 15, 2010

Big nations with major debt dangers

In the January 15, 2010 Business Week article "Debtor Nations," Mark Scott explains how excessive public debt is threatening the global economy:

The Debt Bomb Facing the World

If policymakers focused their attention in 2009 on dragging the global economy out of recession, this year looks likely to center on reining in the massive piles of government debt built up by big bailout packages. Failing to wrestle down the fiscal debt monster could stall the nascent worldwide economic recovery.

Already this year, international rating agencies have warned about unsustainable budget deficits in Greece and Ireland, and most members of the euro zone have sailed past the 3% budget deficit cap required for membership in the common European currency. Government debt ratios in the U.S. and Britain could take decades to return to normal levels.

Countries are fiendishly trying to tackle the problem. On deck for this year are spending cuts, tax increases, and other belt-tightening measures designed to corral overstretched government accounts. Yet politicians must balance tougher fiscal policy with maintaining continued support for weak domestic production. Economists fear pulling back too soon could ruin attempts to reignite the economy.

Read on to see how indebted some of the world's largest countries are—and who are the deepest in the red—as well as what they're doing to deal with the problem.

Iceland made headlines in 2009 as the world's first "subprime nation." The implosion of the country's financial-services industry left it with debt three times domestic GDP, and forced Iceland to go cap-in-hand to the International Monetary Fund for a $2.1 billion bailout. Yet when President Olafur Grimsson vetoed legislation on Jan. 6 that would have repaid $6 billion to British and Dutch authorities for covering their local depositors in a failed Icelandic bank, the country's international financial lifeline was put in jeopardy.

* Latest available figure** All 2010 figures here and subsequently are forecasts.

With the largest debt burden relative to the size of its domestic economy in Europe, Greece is viewed as the sick man of the region. Not helping matters, the European Commission criticized the country on Jan. 12 for publishing false economic numbers. That comes after local policymakers were forced to revise the 2008 budget deficit figure to 12.7%—three times an earlier forecast. To get the country's books in order, politicians want to raise an extra $6.5 billion this year through pay freezes for government workers and new taxes.

The $787 billion economic stimulus package and the further billions of dollars pumped into the financial-services sector have pushed America's debt burden to almost 100% of annual GDP. That's unsustainable in the long term, but expected 1.5% growth in the domestic economy this year has reassured investors that debt levels remain manageable. While no widespread tax increases are on tap this year, the Obama Administration is planning some targeted taxes to fill the gap. But health-care reform currently working its way through Congress could add billions of dollars to the federal budget.

With one of the worst budget deficits in the European Union, Britain must tighten its belt or face dire fiscal problems. No definite plans are expected before a national election later this spring, although all major political parties agree government spending must be cut and taxes will increase. The official retirement age also may rise to ease the country's financial woes, which are particularly dire due to the British economy's reliance on the financial-services industry.

After Spain's credit-fueled construction and real estate sectors imploded, the country's once prosperous economy turned into one of the worst performers in Europe. A large budget surplus before the crisis began will likely turn into a 12% deficit this year, and Spain's uncompetitive workforce has exacerbated the country's current account deficit. To turn things around, analysts reckon the Iberian country must overcome its many structural problems, such as a low caliber of tertiary education and relatively high labor costs.

Once known as the Celtic Tiger, Ireland had the wind knocked out of its sails by the credit crunch. The local housing market contracted 19% last year and the economy shank 7.5%. In response, the Irish government has slashed $5.8 billion from its 2010 budget, including pay cuts for government workers and reductions in subsidies for parents of young children. Affected workers haven't taken the belt-tightening lying down: Thousands took to the Dublin streets in late 2009 to protest.

Last year wasn't kind to Mexico. Slumping oil revenue and lowered export demand from the U.S. hit the Latin American country hard. Rubbing salt into its wounds, international ratings agencies downgraded Mexico's debt late last year. Yet rising energy prices and a gradual rebound in exports have lifted the country's spirits, and its budget deficit is relatively mild. On Jan. 11, Mexico even raised $1 billion in a 10-year bond offering that was oversubscribed by 1.6 times.

You Want the Truth?

Comments

I welcome comments. Please keep them civil, short and to the point. Obscene, profane, abusive and off topic comments will be deleted. Repeat offenders will be blocked. Thanks for taking part — and abiding by these simple rules.

The following information is provided to help you understand the biases that may be inherent in this blog.My primary U.S. economic policy concern is the fiscal irresponsibility of government.The Baby Boom generation, which I am part of, has spent the past 30 years accumulating massive public debt that will be passed to our children, grandchildren, and subsequent generations.I am not opposed to the reduction or elimination of any government spending program.Yet, politicians tend to call for reduced spending in general terms and fail to publicly declare specific cuts they would make.The primary cause of the massive U.S. public debt is revenue reductions (in the form of tax cuts) without similar decreases in government spending.

I am willing to consider the expansion and addition of government programs as well.I do not mind how much or little the government provides to society as long as it is paid for.I am willing to pay higher taxes for services deemed worthy, whether they be national defense, homeland security, or income assistance to those less fortunate than I.And I am certainly willing to pay less in taxes or to deposit any government check I receive.My generation, the Baby Boomers, has been very good at cutting taxes and increasing the size of government, regardless of which political party is in power.This is a prescription for financial chaos that remains a horrible legacy for future generations.

About Me

I am a professor of economics at Jacksonville University, where I teach courses in introductory economics, comparative economic development, and globalization. I use this blog to keep in touch with my current and former students. Teachers and students at other schools, as well as others interested in economic issues, are welcome to use this resource.